Issai 200

The International Standards of Supreme Audit Institutions, or ISSAIs, are issued by
INTOSAI, the International Organisation of Supreme Audit Institutions. For more

information visit www.issai.org
INTOSAI
Fundamental Principles of
Financial Auditing
Fundamental Principles of Financial Auditing
INTRODUCTION ...................................................................................................................................................... 1
PURPOSE AND AUTHORITY OF THE FUNDAMENTAL PRINCIPLES OF FINANCIAL AUDITING .............. 2
FRAMEWORK FOR FINANCIAL AUDITING ......................................................................................................... 4
The objective of financial auditing ...................................................................................................................... 4
Public-sector applications covered by ISSAI 200 .............................................................................................. 4
Preconditions for an audit of financial statements in accordance with the ISSAIs ..................................... 4
Audits of financial statements prepared in accordance with special-purpose frameworks ....................... 7
Audits of single financial statements and specific elements, accounts or items of
a financial statement ....................................................................................................................................... 7
ELEMENTS OF FINANCIAL AUDITING ................................................................................................................ 8
The three parties in financial auditing ................................................................................................................ 8
Suitable criteria .................................................................................................................................................... 9
Subject matter information .................................................................................................................................. 9
Reasonable assurance engagement.................................................................................................................. 9
PRINCIPLES OF FINANCIAL AUDITING .............................................................................................................. 9
General principles ................................................................................................................................................ 9
Prerequisites for conducting financial audits ..................................................................................................... 9
Ethics and independence ............................................................................................................................... 9
Quality control................................................................................................................................................ 10
Engagement team management and skills ................................................................................................. 11
Principles related to basic audit concepts ........................................................................................................ 11
Audit risk ........................................................................................................................................................ 11
Professional judgement and professional scepticism ................................................................................. 12
Materiality....................................................................................................................................................... 13
Communication.............................................................................................................................................. 14
Documentation .............................................................................................................................................. 15
Principles related to the audit process ............................................................................................................. 16
Agreeing the terms of the engagement ....................................................................................................... 16
Planning ......................................................................................................................................................... 17
Understanding the audited entity ................................................................................................................. 17
Risk assessment ........................................................................................................................................... 19
Responses to assessed risks ....................................................................................................................... 20
Considerations relating to fraud in an audit of financial statements .......................................................... 21
Going-concern considerations...................................................................................................................... 22
Considerations relating to laws and regulations in an audit of financial statements ................................ 24
Audit evidence ............................................................................................................................................... 25
Consideration of subsequent events ........................................................................................................... 27
Evaluating misstatements............................................................................................................................. 28
Forming an opinion and reporting on the financial statements .................................................................. 29
Considerations relevant to audits of group financial statements
(including whole-of-government financial statements) ............................................................................... 37
INTRODUCTION
1. Professional standards and guidelines are essential for the credibility, quality and
professionalism of public-sector auditing. The International Standards of Supreme Audit
Institutions (ISSAIs) developed by the International Organisation of Supreme Audit
Institutions (INTOSAI) aim to promote independent and effective auditing and support the
members of INTOSAI in the development of their own professional approach in accordance
with their mandates and with national laws and regulations.
2. ISSAI 100 – Fundamental Principles of Public-Sector Auditing provides the fundamental

principles for public-sector auditing in general and defines the authority of the ISSAIs.
ISSAI 200 – Fundamental Principles of Financial Auditing has been developed to address the
key principles related to an audit of financial statements in the public sector. It builds on and
further develops the fundamental principles of ISSAI 100 to suit the specific context of audits
of financial statements, and constitutes the basis for auditing standards related to audits of
financial statements. ISSAI 200 should be read and understood in conjunction with ISSAI 100.
3. The main purpose of the ISSAIs on financial audit is to provide INTOSAI members with a
comprehensive set of principles, standards and guidelines for the audit of financial statements
of public-sector entities. In addition to ISSAI 200, the ISSAIs on financial audit comprise the
Financial Audit Guidelines (ISSAIs 1000-2999) at level 4 of the ISSAI Framework. A general
introduction to these guidelines is given in ISSAI 1000, while ISSAIs 1200 to 1810 each contain
Practice Notes issued by INTOSAI to provide guidance on the application of the International
Standards on Auditing (ISAs 200 to 810) developed by the International Auditing and
Assurance Standards Board (IAASB). Each Practice Note and the corresponding ISA together
constitute a guideline in the ISSAI Framework.
4. Financial audit focuses on determining whether an entity’s financial information is presented in

accordance with the applicable financial reporting and regulatory framework. The scope of
financial audits in the public sector may be defined by the SAI’s mandate as a range of audit
objectives in addition to the objectives of an audit of financial statements prepared in accordance
with a financial reporting framework. These objectives may include the auditing of:
states’ or entities’ accounts or other financial reports, not necessarily prepared in

accordance with a general-purpose financial reporting framework;
budgets, budget sections, appropriations and other decisions on the allocation of
resources, and the implementation thereof;
policies, programmes or activities defined by their legal basis or source of
financing; legally-defined areas of responsibility, such as the responsibilities of
ministers; and categories of income or payments or assets or liabilities.
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5. When the SAI’s mandate defines such additional audit objectives, the SAI may also need to
consider developing or adopting standards based on the general fundamental principles of
public-sector auditing in ISSAI 100 and the fundamental principles of compliance and
performance auditing. The guidance of the Financial Audit Guidelines on special-purpose
frameworks1, audits of single financial statements and specific elements, accounts or items of
a financial statement2, and reports on summary financial statements 3, may also be relevant for
such purposes.
6. This ISSAI provides detailed information on the following:
The purpose and authority of the Fundamental Principles of Financial

Auditing The framework for auditing financial statements in the public sector
The elements of an audit of financial statements
The principles of an audit of financial statements.
PURPOSE AND AUTHORITY OF THE FUNDAMENTAL PRINCIPLES

OF FINANCIAL AUDITING
7. ISSAI 200 provides the fundamental principles for an audit of financial statements prepared in
accordance with a financial reporting framework. The principles also apply when an SAI is
engaged or has responsibility to audit single financial statements and specific elements, accounts
or items of a financial statement, or financial statements prepared in accordance with special-
purpose financial frameworks, or summary financial statements. Where reference is made in ISSAI
200 to audits of financial statements, this includes responsibilities of this nature.
8. ISSAIs 1000 to 1810 on financial audits may be applied as appropriate to these

responsibilities. However, auditors are prohibited from making reference to the use of
the ISSAIs if:
the preconditions for an audit in accordance with the ISSAIs on financial audit are not
in place4; or
the auditor is not able to comply with the authority attached to the ISAs5 and ISSAIs.
9. The Fundamental Principles of Financial Auditing apply to all public-sector audits of financial
statements, whether for the whole of government, parts of government or single entities.
10. ISSAI 200 – Fundamental Principles of Financial Auditing represents the core of the detailed
auditing standards provided by ISSAIs 1000 to 1810 at level 4 of the ISSAI Framework. The
principles in ISSAI 200 can be used in three ways:
1
ISSAI 1800 – Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks.
2
ISSAI 1805 – Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts or Items of a
Financial Statement.
3
ISSAI 1810 – Engagements to Report on Summary Financial Statements.
4
ISSAI 1210 – Agreeing the Terms of Audit Engagements, paragraphs 6-8.
5
ISSAI 1000, paragraphs 37-43.
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as a basis on which to develop standards,

as a basis on which to adopt consistent national standards,
as a basis for adoption of the Financial Audit Guidelines as the authoritative standards.
11. Reference to ISSAI 200 in reports should only be made if auditing standards have been
developed or adopted that fully comply with all relevant principles of ISSAI 200. A principle is
considered relevant when it deals with the type of audit or combinations of audit types and
the circumstances or procedures are applicable. The principles in no way override national
laws, regulations or mandates.
12. When adopting or developing audit standards based on the Fundamental Auditing Principles,
reference to these in reports may be made by stating:
…We conducted our audit in accordance with [standards], which are based on
[or consistent with] the Fundamental Auditing Principles (ISSAIs 100-999) of the
International Standards of Supreme Audit Institutions.
13. SAIs adopting the Financial Audit Guidelines on level 4 as their authoritative standards
should make reference to these in their reports. Depending on the standards applied and the
SAI’s mandate, this can be done in two ways:
a) In accordance with ISSAIs 1000-1810 – this means full compliance with all relevant
ISAs and the additional guidance set out in the INTOSAI Practice Notes;
b) In accordance with the ISAs – this entails compliance with all relevant ISAs.
ISSAI 100 further explains the authority attached to the ISSAIs.
14. When the level 4 ISSAIs are used as authoritative standards, the public-sector auditors should
also respect the authority of the ISAs. SAIs are encouraged to strive towards full adoption of
the level 4 guidelines as their authoritative standards, as they have been developed to reflect
best practice. INTOSAI recognises that in some environments this might not be possible due
to the absence of basic administrative structures or because laws or regulations do not
establish the same premises for carrying out audits of financial statements in accordance with
the Financial Audit Guidelines. Where this is the case, SAIs have the option of developing
authoritative standards based on the Fundamental Principles of Financial Auditing.
15. When the level 4 ISSAIs are used as the authoritative standards for an audit of financial
statements conducted together with a compliance audit, the public-sector auditors should
respect the authority of both the Financial Audit Guidelines and the Compliance Audit
Guidelines6.
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ISSAI 4000 – General Introduction to Guidelines on Compliance Audit and ISSAI 4200 – Compliance Audit Guidelines Related to
Audit of Financial Statements.
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FRAMEWORK FOR FINANCIAL AUDITING
The objective of financial auditing
16. The purpose of an audit of financial statements is to enhance the degree of confidence of
intended users in the financial statements. This is achieved through the expression of an
opinion by the auditor as to whether the financial statements are prepared, in all material
respects, in accordance with an applicable financial reporting framework, or – in the case of
financial statements prepared in accordance with a fair presentation financial reporting
framework – whether the financial statements are presented fairly, in all material respects, or
give a true and fair view, in accordance with that framework. Laws or regulations binding
public-sector audit organisations may prescribe other wordings for this opinion. An audit
conducted in accordance with standards based on the INTOSAI Fundamental Principles of
Financial Auditing and relevant ethical requirements will enable the auditor to express such
an opinion.
17. ISSAI 200 is based on the following objectives, as defined in ISSAI 1200 7:
In conducting an audit of financial statements, the overall objectives of the auditor are:
a) To obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, thereby enabling the auditor
to express an opinion on whether the financial statements are prepared, in all material
respects, in accordance with an applicable financial reporting framework; and
b) To report on the financial statements, and communicate the result of the audit, in
accordance with the auditor’s findings.
Public-sector applications covered by ISSAI 200
Preconditions for an audit of financial statements in accordance with the ISSAIs
18. The auditor should assess whether the preconditions for an audit of
financial statements have been met.
19. A financial audit conducted in accordance with the ISSAIs is premised on the
following conditions:
The financial reporting framework used for preparation of the financial statements is
deemed to be acceptable by the auditor.
The management of the entity acknowledges and understands its responsibility:
o For preparation of the financial statements in accordance with the applicable financial
reporting framework, including, where relevant, their fair presentation;
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ISSAI 1200, paragraph 11 of ISA 200.
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o For such internal control that management deems necessary for the preparation of
financial statements that are free from material misstatement, whether due to fraud
or error; and
o To provide the auditor with unrestricted access to all information of which it is aware and
that is relevant to the preparation of the financial statements.
20. Financial reporting frameworks may be for general use or specific use. A framework designed
to meet the information needs of a wide range of users is referred to as a general-purpose
framework, while special-purpose frameworks are designed to meet the specific needs of a
specific user or group of users. Frameworks may also be referred to as fair presentation
frameworks or compliance frameworks. A fair presentation framework requires compliance
with the framework but allows, explicitly or implicitly, that it may be necessary to depart from a
requirement or to provide additional information in order to achieve fair presentation of the
financial statements. The term compliance framework is used to refer to a financial reporting
framework that requires compliance with the requirements of the framework and does not
acknowledge the possibility of such deviations to achieve a fair presentation.
21. Without an acceptable financial reporting framework, the management will have no appropriate
basis for preparing the financial statements and the auditor no suitable criteria for auditing
them. Suitable criteria should be formal. For example, in the preparation of financial
statements the criteria may be the International Public Sector Accounting Standards (IPSASs),
the International Financial Reporting Standards (IFRSs), or other international or national
financial reporting frameworks for use in the public sector.
22. A complete set of financial statements for a public-sector entity, when prepared in
accordance with a financial reporting framework for the public sector, normally consists of:
a statement of financial position;

a statement of financial performance;
a statement of changes in net assets/equity;
a cash flow statement;
a comparison of budget and actual amounts – either as a separate additional
financial statement or as a reconciliation;
notes, comprising a summary of significant accounting policies and other
explanatory information.
In certain environments a complete set of financial statements may also include other
reports, such as reports on performance and appropriation reports.
If the financial statements are prepared in accordance with a framework for other accounting
bases, such as modified accrual or a cash basis, a complete set of financial statements may
not include all of the above.
23. Frameworks prescribed by law or regulation will often be deemed acceptable by the
auditor. However, even if deemed unacceptable, such a framework may be allowable if:
the management agrees to provide the necessary additional disclosures in the financial
statements to avoid their being misleading; and
the auditor’s report on the financial statements includes an Emphasis of Matter
paragraph drawing users’ attention to such additional disclosures.
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If the above conditions are not met, the auditor should evaluate the effect of the
misleading nature of the financial statements on the auditor’s report and the opinion, and
consider the need to inform the legislature about the matter.
24. Acceptable financial reporting frameworks normally exhibit certain attributes that ensure
that the information provided in the financial statements is of value to the intended users:
Relevance – the information provided in the financial statements is relevant to the nature of
the audited entity and the purpose of the financial statements;
Completeness – no transactions, events, account balances or disclosures that could
affect conclusions based on the financial statements are omitted;
Reliability – the information provided in the financial statements:
(i) where applicable, reflects the economic substance of events and transactions and
not merely their legal form; and
(ii) results, when used in similar circumstances, in reasonably consistent
evaluation, measurement, presentation and disclosure;
Neutrality and objectivity – the information in the financial statements is free from bias;
Understandability – the information in the financial statements is clear and
comprehensive and not open to significantly diverse interpretations.
Appendix 2 to ISSAI 1210 8 may provide further assistance for the auditor in
determining whether the financial reporting framework is acceptable.
25. In some public-sector audit environments, financial audits are referred to as budget execution
audits, which often include the examination of transactions against the budget for compliance
and regularity issues. Such audits may be undertaken on a risk basis or with the aim of
covering all transactions. In such audit environments there is often no acceptable financial
reporting framework. The results of financial transactions may be presented as a comparison
between expenditure amounts and budgetary amounts. In environments where such audits are
undertaken and there are no financial statements presented in accordance with an acceptable
financial reporting framework, the auditor may conclude that the preconditions for an audit
established by the ISSAIs on financial audit are not in place. Auditors may thus consider
developing standards using the Fundamental Principles of Financial Auditing as guidance to
suit their specific needs. Where the audit mandate refers to financial audit but does not link this
to financial statements prepared in accordance with a financial reporting framework, it is
proposed that the ISSAIs be considered best available practice and the spirit of the ISSAIs be
implemented through standards devised for the specific environment. Where the audit mandate
refers to audits of single financial statements and specific elements, accounts or items of a
financial statement, ISSAI 1805 9 may be relevant.
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ISSAI 1210 – Agreeing the Terms of Audit Engagements.
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26. The type of audit performed in environments where compliance with authorities is the main
focus of the audit would normally be considered a compliance audit. ISSAI 400 – Fundamental
Principles of Compliance Auditing may be a relevant source of information for the
development or adoption of standards for the audit work. If, on the other hand, the audit
mandate allows for a change in audit procedures and the use of acceptable financial reporting
frameworks is introduced for the preparation of financial statements, the ISSAIs on financial
auditing may be adopted subsequently.
Audits of financial statements prepared in accordance with special-purpose frameworks
27. The principles of ISSAI 200 are applicable to audits of financial statements prepared in
accordance with both general-purpose and special-purpose frameworks. In addition to
preparing general-purpose financial statements, a public-sector entity may prepare financial
statements for other parties (such as governing bodies, the legislature or other parties with an
oversight function), which may require financial statements tailored to meet their specific
information needs. In some environments financial statements of this kind are the only financial
statements prepared by the public-sector entity. Financial statements prepared for a special
purpose are not appropriate for the general public. Auditors should, therefore, carefully
examine whether the financial reporting framework is designed to meet the financial
information needs of a wide range of users (general-purpose framework) or of specific users,
or the requirements of a standard-setting body.
28. Special-purpose frameworks relevant to the public sector may include:
the cash receipts and disbursements basis of accounting for cash flow information that
an entity may be required to prepare for a governing body;
the financial reporting provisions established by an international funding organisation
or mechanism;
the financial reporting provisions established by a governing body, the legislature or
other parties that perform an oversight function to meet the requirements of that body; or
the financial reporting provisions of a contract, such as a project grant.
29. The principles of ISSAI 200 are relevant for audits of financial statements prepared in
accordance with such frameworks. In addition to these principles, SAIs may find it useful, when
developing or adopting standards based thereon, to consider the requirements and guidance
in ISSAI 1800, which deals with special considerations in the application of ISSAIs 1200-1700
to an audit of financial statements prepared in accordance with a special-purpose framework.
Audits of single financial statements and specific elements, accounts or items of a financial
statement
30. The principles of ISSAI 200 are also applicable to audits of public-sector entities that prepare
financial information, including single financial statements or specific elements, accounts or
items of a financial statement, for other parties (such as governing bodies, the legislature or
other parties with an oversight function). Such information may come under the audit mandate
of the SAI. Auditors may also be engaged to audit single financial statements, or specific
elements, accounts or items – such as projects financed by the government –although they
are not engaged to audit the complete set of financial statements of the entity concerned.
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31. SAIs may also find it useful to consider the requirements and guidance in ISSAI 1805 when
developing or adopting standards based on the principles in ISSAI 200. ISSAI 1805 deals with
special considerations in the application of the requirements of the ISAs to an audit of a single
financial statement or of a specific element, account or item of a financial statement. The
single financial statement or the specific element, account or item of a financial statement may
be prepared in accordance with a general-purpose or special-purpose framework.
ELEMENTS OF FINANCIAL AUDITING
32. Audits of financial statements are defined as assurance engagements, which involve at least
three separate parties: an auditor, a responsible party and intended users. The elements of
public-sector auditing are described in ISSAI 10010. ISSAI 200 covers additional aspects of
the elements relevant to an audit of financial statements.
The three parties in financial auditing
33. In an audit of financial statements, the responsible party is responsible for the subject matter
information (normally the financial statements themselves) and may also be responsible for the
underlying subject matter (the financial activities reflected in the financial statements). The
responsible party is normally the executive branch of government and/or its underlying
hierarchy of public-sector entities responsible for the management of public funds, the exercise
of authority under the control of the legislature, and the content of the financial statements.
These bodies are expected to manage resources and exercise authority in accordance with
the decisions and premises of the legislature.
34. Legislators represent the citizens, who are the ultimate users of financial statements in the
public sector. The “intended user” is primarily the parliament, which represents the citizens by
making decisions and determining the priorities of public finance and the purpose and content
of spending and income as part of a public democratic process. The legislature’s decisions and
premises may form the basis of the broader perspective of financial audit in the public sector.
For public-sector entities, legislators and regulators are often the primary users of their
financial statements.
35. The responsible party and the intended users may be from the same public-sector entities or
from different bodies. In the first scenario, the supervisory board of a governmental structure
may seek assurance about information provided by the management board of the same
public-sector entity. The relationship between the responsible party and the intended users
needs to be viewed within the context of the specific engagement and may differ from more
traditionally-defined lines of responsibility.
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ISSAI 100 – Fundamental Principles of Public-Sector Auditing.
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Suitable criteria
36. Criteria are the benchmarks used to evaluate or measure the subject matter, including, where
relevant, benchmarks for presentation and disclosure. The criteria used in the preparation of
financial statements are normally formal and may be IPSASs, IFRSs or other national
financial reporting frameworks for use in the public sector.
Subject matter information
37. The financial position, financial performance, cash flows and notes presented in the financial
statements (subject matter information) result from applying a financial reporting framework
for recognition, measurement, presentation and disclosure (criteria) to a public-sector entity's
financial data (subject matter). The term “subject matter information” refers to the outcome of
the evaluation or measurement of the subject matter. It is on the subject matter information
(e.g. the entity's financial statements) that the auditor gathers sufficient appropriate audit
evidence to provide a reasonable basis for expressing an opinion in the auditor’s report.
Reasonable assurance engagement
38. Audits of financial statements conducted in accordance with the ISSAIs are reasonable
assurance engagements. Reasonable assurance is high, but not absolute, given the inherent
limitations of an audit, the result of which is that most of the audit evidence obtained by the
auditor will be persuasive rather than conclusive. In general, reasonable assurance audits are
designed to result in a conclusion expressed in a positive form, such as “in our opinion the
financial statements present fairly, in all material respects (or give a true and fair view of) the
financial position of … and its financial performance and cash flows …” or, in the case of a
compliance framework, “in our opinion the financial statements are prepared, in all material
respects, in accordance with ...”.
39. Limited assurance engagements, such as review engagements, are not covered at present by
the ISSAIs on financial audits. Such engagements provide a lower level of assurance than
reasonable assurance engagements, and are designed to result in a conclusion expressed in
a negative form, such as “nothing has come to our attention that would cause us to believe
that the financial statements were not presented fairly in all material respects”. Auditors
performing such engagements may need to apply guidance from outside the financial audit
ISSAIs; the fundamental auditing principles in ISSAI 100 may be useful in this regard.
PRINCIPLES OF FINANCIAL AUDITING
General principles
Prerequisites for conducting financial audits
Ethics and independence
40. The auditor should comply with the relevant ethical requirements, including those
pertaining to independence, when carrying out audits of financial statements.
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41. Auditors conducting audits in accordance with the ISSAIs are subject to ISSAI 30 – Code of
Ethics as applied in the national context. Auditors at SAIs that have adopted the level 4
ISSAIs as their authoritative standards, or that apply the ISAs, are required either to comply
with the Code of Ethics for Professional Accountants issued by the International Ethics
Standards Board for Accountants (IESBA) (the IESBA Code), which establishes fundamental
ethical principles for professional accountants, or to adopt national requirements that are at
least as demanding; the INTOSAI Code of Ethics applied in the national context may be
relevant here. SAIs must therefore adopt the ethical requirements of ISSAI 30 or the IESBA
Code in their environment in order to be able to state in their reports that the audit was
conducted in accordance with the ISSAIs or the ISAs.
Quality control
42. The auditor should implement quality control procedures at the engagement level that
provide reasonable assurance that the audit complies with professional standards and
the applicable legal and regulatory requirements, and that the auditor’s report is
appropriate in the circumstances.
43. As stated in ISSAI 100, SAIs should adopt quality control procedures in accordance with ISSAI
40 – Quality Control for SAIs, which provides the context for the IAASB’s International
Standards on Quality Control (ISQC 1) in a public-sector environment. ISQC 1 establishes
standards and provides guidance for an organisation’s system of quality control. Although the
general purpose and key principles of ISSAI 40 are consistent with ISQC 1, the requirements
of ISSAI 40 have been adapted to ensure they are relevant to SAIs.
44. The Head of the SAI or the equivalent collective body has overall responsibility for introducing
and maintaining quality control procedures in the SAI, although day-to-day operational
responsibility may be delegated to others. For example, any lead auditor with responsibility
for an audit engagement would ultimately report to the Head of the SAI.
45. Public-sector auditors engaged on audits of financial statements in accordance with

standards based on or consistent with the principles of ISSAI 200 are subject to quality
control requirements at the engagement level. When developing standards based on ISSAI
200 or adopting standards consistent with ISSAI 200, SAIs should consider formulating
requirements related to:
the need for the lead auditor to take responsibility for overall quality in each audit
engagement;
the need for the lead auditor to ensure that members of the audit team comply with the
relevant ethical requirements;
the need for the lead auditor to form a conclusion regarding compliance with the
independence requirements that apply to the audit engagement, and to take
appropriate action to eliminate threats to independence;
the need for the lead auditor to be satisfied that the audit team and any external
experts collectively have the appropriate competence and capabilities;
the need for the lead auditor to take responsibility for the performance of the audit,
specifically:
o leading, supervising and carrying out the audit;
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o ensuring that reviews are conducted in accordance with the SAI’s review policies and
procedures.
Engagement team management and skills
46. The auditor should be satisfied that the entire audit team, and any external
experts, collectively have the competence and capabilities to:
a) carry out the audit in accordance with the relevant standards and the applicable legal
and regulatory requirements; and
b) enable the auditor to issue a report that is appropriate in the circumstances.
47. When addressing the competence and capabilities expected of the team as a whole, the
auditor may consider the team’s:
Understanding, through appropriate training, and practical experience of audit

engagements of a similar nature and complexity;
Understanding of professional standards and the applicable legal and
regulatory requirements;
Technical expertise, including the relevant IT skills and knowledge of specialised areas
of accounting or auditing;
Knowledge of relevant industries in which the audited organisation
operates; Ability to apply professional judgement;
Understanding of the SAI’s quality control policies and procedures;
Ability to discharge the terms of the audit mandate in the relevant environment, including
an understanding of the applicable reporting arrangements, and to report to the legislature
or other governing body or in the public interest;
Skills in the field of performance auditing or compliance auditing, if relevant.
Principles related to basic audit concepts
48. ISSAIs 1000-2999 give best practice for the application of the Fundamental Principles of
Financial Auditing. However, if an SAI chooses to develop standards based on the
fundamental principles, or adopt national standards that are consistent with the principles,
the matters covered by this and the following sections should be addressed.
Audit risk
49. The auditor should reduce audit risk to an acceptably low level in the circumstances of
the audit so as to obtain reasonable assurance as the basis for an opinion expressed in
a positive form.
50. The audit risk in an audit of financial statements is the risk that the auditor will express an
inappropriate conclusion if the subject matter information is materially misstated. The auditor
will reduce the risk to an acceptably low level in the circumstances of the audit to obtain
reasonable assurance as the basis for expressing a conclusion in a positive form. To be
meaningful, the level of assurance obtained by the auditor must enhance the intended
users’ confidence about the subject matter information to a degree that is clearly more than
inconsequential.
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51. In general, the audit risk depends on the following components:
The risks of material misstatement consist of inherent risk and control risk:
a) Inherent risk – the susceptibility of the subject matter information to

material misstatement, assuming that there are no related controls;
b) Control risk – the risk that a material misstatement could occur and will not be
prevented, or detected and corrected, at the appropriate time by related controls. If
relevant to the subject matter, some control risk will always exist because of the
limitations inherent in the design and operation of internal controls.
Audit risk is a function of the risks of material misstatement and detection risk:
c) Detection risk – the risk that the auditor will not detect a material misstatement.
52. The assessment of risks is based on audit procedures to obtain information necessary for that
purpose, as well as evidence obtained throughout the audit. The risk assessment is a matter
of professional judgement and is not capable of precise measurement. The degree to which
the auditor considers each element of risk will depend on the circumstances of the audit.
Professional judgement and professional scepticism
53. The auditor should plan and perform the audit with professional scepticism, recognising
that circumstances may exist that cause the financial statements to be materially
misstated. When planning, performing, concluding and reporting an audit of financial
statements, the auditor should exercise professional judgement.
54. The terms “professional scepticism” and “professional judgement” are relevant when
formulating requirements regarding the auditor's decisions about the appropriate response to
matters concerning the audit. They express the attitude of the auditor, which includes a
questioning mind. These concepts are set out in the ISSAIs on financial audit.
55. The concept of professional judgement is applied by the auditor at all stages of the audit
process. It covers the application of relevant training, knowledge and experience, within
the context provided by auditing, accounting and ethical standards, when making informed
decisions about the courses of action that are appropriate in the circumstances of the audit
engagement11.
56. Professional judgement is necessary in particular in decisions about:
materiality and audit risk;

the nature, timing and extent of the audit procedures used to meet the requirements of the
ISSAIs and the ISAs and gather audit evidence;
evaluating whether sufficient appropriate audit evidence has been obtained, and whether
more needs to be done to achieve the auditor’s overall objectives;
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ISSAI 1200, paragraph 13.
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the evaluation of management’s judgement in applying the financial reporting framework

applicable to the audited entity;
the drawing of conclusions from the audit evidence obtained – for example, assessing
the reasonableness of the estimates made by management in preparing the financial
statements.
57. Professional scepticism is fundamental to all audit engagements. The auditor plans and
performs an assurance engagement with an attitude of professional scepticism, recognising
that circumstances may exist that cause the subject matter information to be materially
misstated. An attitude of professional scepticism means that the auditor makes a critical
assessment, with a questioning mind, of the validity of the evidence obtained and is alert to
evidence that contradicts or calls into question the reliability of documents or
representations by the responsible party. Such an attitude is necessary throughout the audit
process so as to reduce the risk of overlooking suspicious circumstances, over-generalising
when drawing conclusions from observations, and using false assumptions to determine the
nature, timing and extent of evidence-gathering procedures and evaluate the results thereof.
Materiality
58. The auditor should apply the concept of materiality in an appropriate manner
when planning and performing the audit.
59. A misstatement is material, individually or when aggregated with other misstatements, if it could
reasonably be expected to influence the decisions taken by users on the basis of the financial
statements. Materiality has both quantitative and qualitative aspects. In the public sector, it is not
limited to economic decisions by users, as decisions as to whether to continue certain
government programmes or grant funding may be based on the financial statements. The
qualitative aspects of materiality generally play a greater role in the public sector than in other
types of entities. The assessment of materiality and the consideration of sensitivity and other
qualitative factors in a particular audit are matters for the auditor’s judgement.
60. When determining the audit strategy, the auditor should assess materiality for the financial
statements as a whole. If, for one or more classes of transactions, account balances or
disclosures, misstatements of amounts less than materiality for the financial statements as
a whole could reasonably be expected to influence the decisions of users on the basis of
the financial statements, the auditor should also determine the materiality level or levels to
be applied to the classes of transactions, account balances or disclosures concerned.
61. The auditor should also determine performance materiality for the purposes of assessing the risk of
material misstatement and determining the nature, timing and extent of further audit procedures.
Planning the audit solely to detect individually material misstatements overlooks the fact that the
aggregate of individually immaterial misstatements may cause the financial statements to be
materially misstated, and leaves no margin for any undetected misstatements. Performance
materiality should be set to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements will exceed the materiality threshold for the financial
statements as a whole. The determination of performance materiality involves the exercise of
professional judgement. It is affected by the auditor’s understanding of the entity, should be
updated during the performance of risk assessment
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procedures, and depends on the nature and extent of misstatements identified in previous
audits and thus the auditor’s expectations in terms of misstatements in the current period.
62. The concept of materiality is applied by the auditor in planning and performing the audit, as
well as in evaluating the effect of identified misstatements on the audit and of any uncorrected
misstatements, including omissions, on the financial statements. The auditor’s opinion deals
with the financial statements as a whole, and therefore the auditor is not responsible for
detecting misstatements that are not globally material. The auditor should still identify and
document quantitative immaterial misstatements, as they may be material due to their nature
or when aggregated. Misstatements below the trivial threshold need not be considered.
63. The materiality determined when planning the audit does not necessarily establish an
amount below which uncorrected misstatements, individually or in the aggregate, will always
be evaluated as immaterial. The circumstances related to some misstatements may cause
the auditor to evaluate them as material even if they are below materiality. Although it is not
practicable to design audit procedures to detect misstatements that could be material solely
because of their nature, the auditor considers not only the size but also the nature of
uncorrected misstatements, and the particular circumstances of their occurrence, when
evaluating their effect on the financial statements. The aspects the auditor considers include
the sensitive nature of certain transactions or programmes, the public interest, the need for
effective legislative oversight and regulation, and the nature of the misstatement or deviation
(e.g. if it is a result of fraud or corruption).
Communication
64. The auditor should identify the appropriate contact person(s) within the audited entity’s
governance structure and communicate with them regarding the planned scope and
timing of the audit and any significant findings.
65. The auditor should communicate with both management and those charged with governance.
Communication entails obtaining information relevant to the audit and providing those charged
with governance with timely observations that are significant and relevant to their oversight of
the financial reporting process. It is important to promote effective two-way communication
with those charged with governance.
66. In the public sector, identifying those charged with governance may be a challenge. The audited
entity may be part of a larger or broader structure with governance bodies at several
organisational levels and across different functions (i.e. vertically and horizontally). As a result, in
some cases several distinct groups can be identified as being charged with governance.
Furthermore, as an audit in the public sector might involve both financial statement objectives as
well as compliance objectives, this too may involve separate governance bodies.
67. Communication should be in writing if the auditor determines that oral communication is not
sufficient. The auditor may also be required to communicate with parties other than those
within the organisation, such as the legislature, regulators or funding agencies.
68. Written communications need not include all matters arising during the course of the
audit. However, written communication is vital for significant audit findings, which auditors
are required to communicate to those charged with governance.
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69. Auditors in the public sector are often the mandated auditors of the whole or major parts of the
government and its administration. In this situation, auditors may have access to information
from other audited entities and audits made in their regard, which might be of relevance to
those charged with governance. Examples of this might include material errors in transactions
with the audited entity that also affect other audited entities, or designs of relevant controls
which have provided efficiency gains in other audited entities. Communicating this type of
information to those charged with governance may add value to the audit when circumstances
permit. However, laws, regulations or ethical requirements may prohibit communication of this
type of information.
Documentation
70. The auditor should prepare audit documentation that is sufficient to enable an
experienced auditor, with no prior knowledge of the audit, to understand the nature,
timing and extent of the audit procedures performed to comply with the relevant
standards and the applicable legal and regulatory requirements, the results of those
procedures and the audit evidence obtained, as well as significant matters arising
during the audit, the conclusions reached in their regard, and significant professional
judgments made in reaching those conclusions. The documentation should be
prepared at the appropriate time.
71. Adequate audit documentation is important for several reasons. It will:
confirm and support the auditor’s opinions and reports;

serve as a source of information for preparing reports or answering any enquiries from
the audited organization or any other party;
serve as evidence of the auditor's compliance with the auditing
standards; facilitate planning, supervision and review;
help with the auditor’s professional development;
help to ensure that delegated work has been satisfactorily executed; and
provide evidence of work done for future reference.
72. Auditing standards based on the fundamental principles need to include further requirements
in relation to documentation in the following areas:
the timely preparation of documentation;

the form, content and extent of documentation;
documentation requirements where the auditor judges it necessary to depart from a relevant
requirement in the applied auditing standards;
documentation requirements where the auditor performs new or additional audit
procedures or draws new conclusions after the date of the auditor’s report;
the assembly of the final audit file.
The level 4 ISSAIs provide additional guidance on adopting requirements and audit
documentation.
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73. For auditors with a judicial role, such as a court of accounts, documentation forms part of the
basis of official rulings. In this environment, due process of law may establish specific and strict
requirements to be adhered to regarding confidentiality of documentation in connection with the
proceedings of a case. Additionally, as decisions may result in a legally binding public credit,
public-sector auditors may be subject to supplementary documentation retention requirements.
Principles related to the audit process
Agreeing the terms of the engagement
74. The auditor should agree or, if the terms of the engagement are clearly
mandated, establish a common understanding of the terms of the audit
engagement with management or those charged with governance.
75. The terms of an audit engagement in the public sector are normally mandated and therefore
not subject to requests from, and agreement with, management or those charged with
governance. Instead of agreeing the terms formally, public-sector auditors may instead choose
to establish a common formal understanding of the respective roles and responsibilities of the
management and the auditor. Since the public-sector auditor is normally engaged by and
reports to the legislature, agreements may need to be reached with both the legislature and
those charged with governance.
76. The auditor should communicate to the appropriate representatives of those charged with
governance the auditor’s responsibilities with regard to the audit of financial statements,
including the auditor’s responsibility to form and express an opinion on the financial
statements prepared by management under the oversight of those charged with governance.
77. If the terms of the engagement are prescribed in sufficient detail by law or regulation, it may not
be necessary to record them in an audit engagement letter or other suitable form of written
agreement. One exception may be the statement by management and, where appropriate,
those charged with governance, that they acknowledge and understand the responsibilities set
out in the specific auditing standards, such as the ISSAIs and the ISAs. As such engagements
are common in the public sector, written agreements on the terms need not be concluded,
although they may assist in clarifying the responsibilities of the parties involved.
78. Those charged with governance should also be sent an overview of the planned scope and
timing of the audit. The auditor should include views about significant qualitative aspects of
the audited entity’s accounting practices, including accounting policies, accounting estimates
and financial statement disclosures.
79. SAIs are normally required to carry out audits as mandated. They do not normally have the
option of rejecting an assignment, even if the preconditions are not met. Standards
developed on the basis of the fundamental principles must provide guidance on suitable
action in such circumstances. ISSAI 121012 includes guidance in this regard.
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ISSAI 1210 – Agreeing the Terms of an Engagement.
16
Planning
80. The auditor should develop an overall audit strategy that includes the scope, timing
and direction of the audit, as well as an audit plan.
81. An overall audit strategy will guide the auditor in the development of the audit plan.
When developing the audit strategy, the auditor needs to:
identify the characteristics of the engagement that define its scope;

ascertain the reporting objectives of the engagement so as to plan the timing of the audit
and the nature of the communications required;
consider the factors that, in the auditor’s professional judgement, are significant in
directing the engagement team’s efforts;
consider the results of preliminary activities and, where applicable, whether knowledge
gained on other engagements performed by the auditor engaged for the audited entity is
relevant;
ascertain the nature, timing and extent of resources necessary to carry out the engagement;
consider the results and knowledge obtained from performance audits and other audit
activities relevant to the audited entity, including the implications of previous
recommendations;
consider and assess the expectations of the legislature and other relevant users of the
audit report.
82. The auditor should plan the audit properly to ensure that it is conducted in an
effective and efficient manner.
83. The auditor should prepare an audit plan, which should include a description of:
the nature, timing and extent of planned risk assessment procedures;

the nature, timing and extent of planned further audit procedures at the assertion level;
other planned audit procedures that are necessary so that the engagement complies with
the applicable standards. Such procedures may include or describe: a review of the legal
framework for the audit; a brief description of the activity, programme or entity to be audited;
the reasons for carrying out the audit; the factors affecting the audit, including those
determining the materiality of matters to be considered; the audit objectives and scope; the
audit approach; the characteristics of the audit evidence to be collected, and the
procedures required to collect and analyse evidence; the necessary resources; a timetable
for the audit; the form, content and users of the auditor’s report and management letter.
84. Both the overall strategy and the audit plan need to be documented. They must also be
updated, as necessary, during the course of the audit.
Understanding the audited entity
85. The auditor should have an understanding of the audited entity and its environment,
including internal control procedures that are relevant to the audit.
86. Understanding the different aspects of the organisation and its environment enables the auditor
to effectively plan and perform the audit. The necessary understanding will include:
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the relevant environment, regulations and other external factors, including the
applicable financial reporting framework;
the nature of the audited entity, including its mode of operation, governance structure,
funding (to enable the auditor to understand the classes of transactions, account balances
and disclosures to be expected in the financial statements), and the selection and
application of accounting policies, including the reasons for changes thereto;
measurement and review of the audited entity’s financial performance;
decisions initiated outside the audited entity as a result of political processes such as
new programmes or budget constraints;
specific laws and regulations to which the audited entity is subject, and the potential
impact of non-compliance with these;
programme objectives and strategies, which may include public policy elements
and therefore have implications for the risk assessment;
governance structures affected by the legal structure of the audited entity, for example
whether the entity is a ministry, department, agency or other type of public-sector body.
87. To obtain an understanding of the control environment, it may be relevant to consider the
audited entity’s communication and enforcement of integrity and ethical values, its
commitment to competence, participation by those charged with governance, the
management’s philosophy and operating style, organisational structure, the existence and
level of internal audit activity, the assignment of authority and responsibility, and human
resource policies and practices.
88. Relevant audit evidence may be obtained through a combination of inquiries and other risk
assessment procedures, such as the corroboration of inquiries through observation or
inspection of documents. For example, by interviewing management and employees, the
auditor may obtain an understanding of how management shares with staff its views on
business practices and ethical behaviour. The auditor may then determine whether relevant
controls have been implemented by considering, for example, whether management has a
written code of conduct and whether it acts in accordance with the code.
89. As part of the understanding process, the auditor also needs to consider whether the
audited entity has a procedure for identifying business risks relevant to financial reporting
objectives, and whether it further estimates the significance of those risks by assessing the
likelihood of their occurrence. If such a procedure has been established, the auditor needs
to obtain an understanding of it, and the results thereof.
90. The auditor’s understanding of internal control relevant to financial reporting may include
the following areas:
the classes of transactions in the audited entity’s operations that are significant to
the financial statements;
the procedures, both manual and using IT, by which those transactions are initiated,
recorded, processed, corrected as necessary, transferred to the general ledger and reported
in the financial statements;
the accounting records, supporting information and specific accounts in the financial
statements that are used to initiate, record, process and report transactions; this includes
procedures for correcting incorrect information and transferring information to the general
ledger;
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how the information system captures events and conditions, other than transactions,
that are significant to the financial statements;
the financial reporting process used to prepare the audited entity’s financial statements,
including significant accounting estimates and disclosures;
controls surrounding journal entries, including non-standard journal entries used to record
unusual non-recurring transactions or adjustments;
relevant controls that relate to compliance with authorities;
controls related to monitoring performance against the budget;
controls related to transferring budgetary funds to other audited entities;
controls of classified national security and sensitive personal data, such as tax and health
information; and
supervision and other controls performed by parties outside the audited entity in areas such
as:
o compliance with laws and regulations, such as procurement regulations;

o execution of the budget;
o other areas as defined by legislation or audit mandate; and
o management accountability.
91. Auditing does not require an understanding of all the controls carried out for each significant
class of transactions, account balance and disclosure in the financial statements, or for every
assertion relevant to them. However, an understanding of an audited entity’s controls and, if
relevant, government-wide controls is not sufficient to test their operating effectiveness
unless a degree of automation provides for consistency in the implementation of the controls.
Risk assessment
92. The auditor should assess the risks of material misstatement at the financial statement
level and the assertion level for classes of transactions, account balances and
disclosures so as to provide a basis for further audit procedures.
93. Risk assessment procedures may include:
inquiries of management and staff within the audited entity who, in the auditor’s
judgement, may have information that could assist in identifying risks of material
misstatement due to fraud or error;
analytical procedures;
observation and inspection.
94. The risks of material misstatement should be identified and assessed at both the financial
statement level and the assertion level for classes of transactions, account balances and
disclosures so as to provide a basis for designing and performing further audit procedures.
For this purpose, the auditor needs to:
identify risks throughout the process of obtaining an understanding of the audited entity
and its environment, by examining relevant controls that relate to the risks and considering
the classes of transactions, account balances and disclosures in the financial statements;
assess the risks identified and evaluate whether they relate more pervasively to the
financial statements as a whole and could potentially affect many assertions;
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relate the risks identified to what could go wrong at the assertion level, taking account
of relevant controls that the auditor intends to test; and
consider the likelihood of misstatement, including the possibility of multiple
misstatements, and whether the potential for misstatement is such as to render it material.
95. As part of the risk assessment, the auditor determines whether any of the risks identified are, in
the auditor’s judgment, significant. In exercising this judgement, the auditor should exclude the
effects of controls identified in relation to the risk. When judging which risks are significant, the
auditor needs to consider at least the following:
whether the risk is a risk of fraud;

whether the risk is related to recent significant economic, accounting or other
developments and, therefore, requires specific attention;
the complexity of transactions;
whether the risk involves significant transactions with related parties;
the degree of subjectivity in the measurement of financial information related to the risk,
especially measurements which involve a wide range of measurement uncertainty;
whether the risk involves significant transactions that are outside the audited entity’s
normal course of business, or that otherwise appear to be unusual; and
whether the risk also affects compliance with laws and regulations.
96. The identification and assessment of the risks of material misstatement at both the financial
statement level and assertion level, and the related controls about which the auditor has
obtained understanding, must be sufficiently documented.
Responses to assessed risks
97. The auditor should act appropriately to address the assessed risks of material
misstatement in the financial statements.
98. Responses to assessed risks include designing audit procedures that address the risks, such as
substantive procedures and test of controls. Substantive procedures include both tests of details
and substantive analysis of classes of transactions, account balances and disclosures.
99. The nature, timing and extent of audit procedures are based on and are responsive to the
assessed risks of material misstatement at the assertion level. In designing the necessary audit
procedures, the auditor should consider the reasons for the assessed risks of material
misstatement at the assertion level for each class of transactions, account balance and
disclosure. Such reasons may include the inherent risk of transactions (the likelihood of
material misstatement due to the particular characteristics of the relevant class of transactions,
account balance or disclosure) and the control risk (whether the risk assessment takes account
of relevant controls).
100. Examination of the control risk requires the auditor to obtain evidence that the controls are
operating effectively (that is, the auditor intends to rely on the operating effectiveness of
controls when determining the nature, timing and extent of substantive procedures).
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101. When designing and performing tests of the relevant controls to obtain sufficient appropriate
evidence as to their operating effectiveness, the auditor should consider that, the greater the
reliance placed on the effectiveness of a control, the more persuasive should be the audit
evidence obtained.
102. The auditor should design and perform substantive procedures for each material
class of transactions, account balance and disclosure, irrespective of the assessed
risks of material misstatement.
103. The auditor should always undertake some substantive testing, irrespective of whether
controls have been tested. In addition, if the auditor has determined that an assessed risk of
material misstatement at the assertion level is significant, substantive procedures should be
performed that specifically respond to that risk. When the approach to a significant risk
consists only of substantive procedures, those procedures should include tests of details.
Considerations relating to fraud in an audit of financial statements
104. The auditor should identify and assess the risks of material misstatement in the
financial statements due to fraud, should obtain sufficient appropriate audit evidence
regarding the assessed risks of material misstatement due to fraud and should
respond appropriately to fraud or suspected fraud identified during the audit.
105. The primary responsibility for the prevention and detection of fraud rests with the entity’s
management and those charged with governance. It is important that management, under the
oversight of those charged with governance, strongly emphasise fraud prevention (limiting
opportunities for fraud to take place) and fraud deterrence (dissuading individuals from
committing fraud because of the likelihood of detection). The auditor is responsible for
obtaining reasonable assurance that the financial statements taken as a whole are free from
material misstatement, whether caused by fraud or error.
106. Misstatements in the financial statements can arise from either fraud or error. The
distinguishing factor is whether the action resulting in a misstatement was intentional or
unintentional. Although fraud is a broad legal concept, the auditor is concerned only with fraud
that causes a material misstatement in the financial statements. Two types of intentional
misstatements are relevant to the auditor – misstatements resulting from fraudulent financial
reporting and those resulting from the misappropriation of assets.
107. The auditor is expected to maintain an attitude of professional scepticism throughout the audit,
recognising the possibility of material misstatement due to fraud at both the financial statement
level and the assertion level for classes of transactions, account balances and disclosures,
notwithstanding the auditor's past experience of the honesty and integrity of the management
and those charged with governance. When performing risk assessment procedures and related
activities to obtain an understanding of the audited entity and its environment, the auditor
should seek to obtain information that can be used to identify risks of material misstatement
due to fraud.
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108. Areas in which auditors should be alert to fraud risks leading to material misstatement may
include procurement, grants, privatisations, intentional misrepresentation of results or information
and misuse of authority or power. When developing standards based on these fundamental
principles, the guidance on fraud risk areas in ISSAI 1240 may be of assistance.
109. Requirements for the reporting of fraud in the public sector may be the subject of specific
provisions in the audit mandate or related laws or regulations, and the auditor may be
required to communicate such issues to parties outside the audited entity, such as regulatory
and enforcement authorities. In some environments, there may be a specific obligation to refer
indications of fraud to investigative bodies and even to cooperate with such bodies on
determining whether fraud or abuse has occurred. In other environments, auditors may be
obliged to report circumstances that may indicate the possibility of fraud or abuse to the
competent jurisdictional body or to the appropriate part of the government or legislature, such
as prosecutors, the police or (if relevant to legislation) affected third parties. Auditors should
also consider that the use of public monies tends to raise the profile of fraud. As a result
auditors may need to be responsive to public expectations regarding fraud detection.
ISSAI 1240 makes reference to the possibility of extending reporting responsibilities within
the public sector so as to address concerns about public accountability.
Going-concern considerations
110. The auditor should consider whether there are events or conditions that may cast
significant doubt on the audited entity’s ability to continue as a going concern.
111. Financial statements are normally prepared on the assumption that the audited entity is a going
concern and will continue to meet its statutory obligations for the foreseeable future. In
assessing whether the going-concern assumption is appropriate, those responsible for
preparation of the financial statements take into account all available information for the
foreseeable future. General-purpose financial statements are prepared on a going-concern
basis unless the legislature has decided to liquidate the audited entity or that it should cease
operation.
112. The going-concern concept may have little or no relevance for “ordinary” public-sector entities
such as those funded through appropriations on the government budget. When such
organisations are abolished or merged with others, their liabilities and assets are usually taken
over by other public-sector entities. For some types of entities, such as government business
enterprises and joint ventures with other principals (including private sector entities operating
in legal forms that provide for limited owner liability), this may not be the case. The
responsibility for implementing government programmes may also be contracted out to private
sector organisations, such as NGOs and private companies, but the programmes may still be
audited by the SAI. There is a general trend towards outsourcing, making the going-concern
concept and the auditor’s judgement in this regard increasingly relevant to public-sector audit.
113. Some financial reporting frameworks contain an explicit requirement for management to make a
specific assessment of the audited entity’s ability to continue as a going concern, as well as
standards relating to the matters to be considered and disclosures to be made in this regard.
Since the going-concern assumption is a fundamental principle in the preparation of financial
statements, management must assess the audited entity’s ability to continue as a going concern
even if the financial reporting framework does not explicitly require them to do so.
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114. The auditor should obtain sufficient appropriate audit evidence about the suitability of
management’s use of the going-concern assumption in the preparation and presentation of
financial statements, and should conclude as to whether there is any material uncertainty about
the audited entity’s ability to continue as a going concern. If the financial statements were
prepared on a going-concern basis but, in the auditor’s judgement, the use of the going-
concern assumption is inappropriate, the auditor should express an adverse opinion. If the
auditor concludes that use of the going-concern assumption is appropriate in the
circumstances and adequate disclosure is made in the financial statements, but that a material
uncertainty exists, the auditor should express an unmodified opinion and include an Emphasis
of Matter paragraph. If such disclosure is not made in the financial statements, the auditor
should express a qualified or adverse opinion, as appropriate, in accordance with ISSAI
170513.
115. The degree of consideration will depend on the facts in each case, and assessments of the
going-concern assumption are not predicated on the solvency test usually applied to
business enterprises. In certain circumstances, while the usual going-concern tests of
liquidity and solvency may appear unfavourable, other factors may suggest that the audited
entity is nonetheless a going concern. For example:
In assessing whether a government is a going concern, the power to levy rates or taxes may
enable some audited entities to be considered as going concerns even though they may
operate for extended periods with negative net assets/equity; and
Assessment of an individual audited entity’s statement of financial position at the reporting
date may suggest that use of the going-concern assumption in the preparation of its
financial statements is not appropriate. However, there may be multi-year funding
agreements or other arrangements in place that will ensure the continued operation of the
audited entity.
116. Generally speaking, determining whether the going-concern assumption is appropriate is

relevant to individual audited entities rather than to government as a whole. In the case of
individual audited entities, before concluding that use of the going-concern assumption is
appropriate, those responsible for the preparation of financial statements may need to
consider a wide range of factors surrounding current and expected performance, the potential
or announced restructuring of organisational units, revenue estimates or the likelihood of
continued government funding, and potential sources of replacement financing.
117. When performing risk assessment procedures the auditor should consider whether there
are any events or conditions that may cast significant doubt on the audited entity’s ability to
continue as a going concern. In forming a view of the audited entity’s ability to continue its
operations, the auditor should examine two separate but sometimes overlapping factors:
the greater risk associated with changes in policy direction (for example, where there is
a change in government); and
the less common operational, or business, risk (for example, where an audited entity
has insufficient working capital to continue its operations at the existing level).
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ISSAI 1705 – Modifications to the Opinion in the Independent Auditor’s Report.
23
Considerations relating to laws and regulations in an audit of financial statements
118. The auditor should identify the risks of material misstatement due to direct and
material non-compliance with laws and regulations. Identification of such risks should
be based on a general understanding of the legal and regulatory framework applicable
to the specific environment in which the audited entity operates, including how the
audited entity complies with that framework.
The auditor should obtain sufficient appropriate audit evidence regarding compliance
with the laws and regulations that are generally recognised to have a direct and material
effect on the determination of material amounts and disclosures in financial statements.
119. The auditor is expected to obtain reasonable assurance as to whether the financial
statements, taken as a whole, are free from material misstatement, whether due to fraud or
error. However, the auditor is not responsible for preventing non-compliance and cannot be
expected to detect all breaches of laws and regulations.
120. When conducting an audit of financial statements in accordance with standards based on
or consistent with ISSAI 200, the auditor needs to have an understanding of the legal and
regulatory framework applicable to the entity.
121. The effect of laws and regulations on the financial statements varies considerably. The laws
and regulations to which an audited entity is subject constitute the applicable legal and
regulatory framework. The provisions of some laws or regulations have a direct effect on the
financial statements in that they determine the nature of reported amounts and disclosures.
While other laws or regulations are to be complied with by management or set the terms under
which the audited entity is allowed to conduct its operations, they do not have a direct effect
on the entity’s financial statements.
122. Non-compliance with laws and regulations may result in fines, litigation or other consequences for
the audited entity that may have a material effect on the financial statements.
123. In the public sector, the distribution by an agency of grants and subsidies may be subject to
specific laws and regulations that will have a direct impact on the financial statements. Often
the financial reporting framework may also include information such as a budget report,
appropriation report or performance report. Where the financial reporting framework includes
such information, the auditor may need to consider specific laws and regulations that could
affect it directly or indirectly.
124. Matters involving non-compliance with laws and regulations that come to the auditor's attention
during the course of the audit should be communicated to those charged with governance,
save where the matters are clearly inconsequential. However, the audit mandate, or obligations
for public-sector entities arising from legislation, regulation, ministerial directives, government
policy requirements or resolutions by the legislature, may result in additional objectives, such
as the responsibility to report all instances of non-compliance with authorities, even where
clearly inconsequential.
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125. This broader scope of reporting may, for example, include the obligation to express a separate
opinion as to the audited entity’s compliance with laws and regulations, or to report cases of
non-compliance. These additional objectives are dealt with in ISSAI 400 – Fundamental
Principles of Compliance Auditing and the related guidelines14. However, even where there
are no such additional objectives, there may be general public expectations in regard to the
auditors’ reporting of non-compliance with authorities. The auditors should therefore bear such
expectations in mind and be alert to instances of non-compliance.
Audit evidence
126. The auditor should perform audit procedures in such a way as to obtain sufficient
appropriate audit evidence and thus draw conclusions on which to base the
auditor’s opinion.
127. Audit procedures should be appropriate in the circumstances for the purpose of obtaining sufficient
appropriate audit evidence. Audit evidence comprises information contained in the accounting
records underlying the financial statements and from other sources. The auditor should consider
both the relevance and the reliability of the information to be used as audit evidence. An audit of
financial statements does not involve the authentication of documentation, nor is the auditor trained
as or expected to be an expert in such authentication. However, the auditor should consider the
reliability of the information to be used as evidence, including photocopies, facsimiles, filmed,
digitised or other electronic documents, and take account, where relevant, of controls over their
preparation and maintenance.
128. Audit evidence should be sufficient and appropriate. Sufficiency is a measure of the quantity of
evidence, while appropriateness relates to the quality of evidence – its relevance and
reliability. The quantity of evidence required depends on the risk of material misstatement of
the subject matter information (the greater the risk, the more evidence is likely to be required)
and on the quality of such evidence (the higher the quality, the less may be required).
Accordingly, the sufficiency and appropriateness of evidence are interrelated. However, merely
obtaining more evidence does not compensate for its poor quality.
129. The reliability of evidence is influenced by its source and nature, and is dependent on the
specific circumstances in which the evidence was obtained. Generalisations about the
reliability of various kinds of evidence can be made – but with important exceptions. Even
when evidence was obtained from sources external to the audited entity, such as external
confirmations, circumstances may exist that could affect the reliability of the information. While
recognising that exceptions may exist, the following generalisations about the reliability of
evidence may be useful:
Evidence is more reliable when it is obtained from independent sources outside the
audited entity.
Evidence that is generated internally is more reliable when the related controls are effective.
14
ISSAI 4000 – Compliance Audit Guidelines – General Introduction and ISSAI 4200 – Compliance Audit Guidelines Related to the
Audit of Financial Statements.
25
Evidence obtained directly by the auditor (for example, through observation of the
application of a control) is more reliable than evidence obtained indirectly or by
inference (for example, through inquiry into the application of a control).
Evidence is more reliable when it exists in documentary form, whether paper, electronic, or
other media (for example, a simultaneous written record of a meeting is more reliable than a
subsequent oral report of what was discussed).
Evidence provided by original documents is more reliable than evidence provided by
photocopies or facsimiles.
130. Greater assurance is ordinarily provided by consistent evidence obtained from different
sources, or of a different nature, than by items of evidence considered individually. In
addition, by obtaining evidence from different sources or of a different nature, it may be
possible to identify individual items of evidence that are unreliable.
131. Audit evidence may be obtained by testing accounting records. As well as information that
supports and corroborates management assertions, account should be taken of any
information that contradicts those assertions. In the case of financial statements in the public
sector, management may often assert that transactions and events were carried out in
accordance with the legislation or due authority, and such assertions may well lie within the
scope of a financial audit. It may also be necessary for auditors in the public sector to
consider the requirements and guidance in the Fundamental Principles of Compliance
Auditing and the related guidelines 15 when developing or adopting standards in such cases.
132. When adopting or developing auditing standards, SAIs should also consider the need
for requirements to obtain sufficient and appropriate audit evidence in relation to:
the use of external confirmations as audit evidence;

audit evidence from analytical procedures and different audit sampling techniques;
audit evidence from the use of fair value measurement, if relevant;
audit evidence when the audited entity has related parties;
audit evidence from the audited entity’s use of service organisations;
audit evidence from using the work of internal audit functions or, when allowed by law
or regulation and considered relevant, the direct assistance of internal auditors;
audit evidence from external experts;
the use of written representations to support audit evidence.
Further guidance on such procedures and requirements are included in the level 4 ISSAIs,
which may be of assistance for SAIs when developing further requirements in these areas.
133. Auditors in certain environments, such as a court of accounts, may be subject to laws and
regulations requiring them to understand and follow precise procedures related to rules of
evidence. Public-sector auditors should familiarise themselves with any such policies and
procedures that describe additional requirements relating to audit evidence and are designed
to ensure compliance with the applicable rules.
15
ISSAIs 400, 4000 and 4200.
26
Consideration of subsequent events
134. The auditor should obtain sufficient appropriate audit evidence that all events occurring
between the date of the financial statements and the date of the auditor’s report that
require an adjustment to, or disclosure in, the financial statements have been identified.
The auditor should also respond appropriately to facts that became known after the
date of the auditor’s report and which, had they been known at that date, might have
caused the auditor to amend the auditor’s report.
135. Procedures should be designed, as nearly as possible, to cover the period from the date of the
financial statements to the date of the auditor’s report. The auditor is not, however, expected
to perform additional audit procedures on matters to which previous audit procedures have
provided satisfactory conclusions. Financial statements may be affected by certain types of
subsequent events (those occurring after the date of the financial statements). Many financial
reporting frameworks specifically refer to such events. Ordinarily, two types of event are
identified:
a) Events that provide evidence of conditions that existed at the date of the
financial statements; and
b) Events that provide evidence of conditions that arose after the date of the financial
statements.
136. Procedures for obtaining sufficient appropriate audit evidence may include:
steps to obtain an understanding of any procedures established by management to

ensure that subsequent events are identified;
inquiries of management;
scrutiny of minutes;
scrutiny of the entity’s most recent interim financial statements, if any.
When making inquiries of management, auditors may need to consider subsequent events
that are relevant to the government entity’s ability to fulfil its programme objectives and may
therefore affect the presentation of performance information in the financial statements.
137. The auditor is under no obligation to perform any audit procedures on the financial statements
after the date of the auditor’s report. However, if, after the date of the auditor’s report but
before the financial statements have been issued, a fact becomes known to the auditor that,
had it been known at the date of the auditor’s report, might have caused an amendment to the
report, appropriate action should be taken. Such action may include:
discussing the matter with the management and, where appropriate, those charged with
governance,
determining whether the financial statements need amendment and, if so,
inquiring how the management intends to address the matter in the financial statements.
27
138. If the management does not take the necessary steps to ensure that anyone in receipt of the
financial statements, where already issued, is informed of the situation, and does not amend the
financial statements in circumstances where the auditor believes they need to be amended, the
auditor should notify the management and those charged with governance that the auditor will seek
to prevent future reliance on the auditor’s report. This may entail seeking legal advice and reporting
to the appropriate statutory body. Further guidance is included in ISSAI 156016.
Evaluating misstatements
139. The auditor should keep a full record of misstatements identified during the audit, and
communicate to management and those charged with governance, as appropriate and on
a timely basis, all misstatements recorded during the course of the audit.
140. Uncorrected misstatements should be evaluated for materiality, individually or in aggregate, to

determine what effect they may have on the opinion to be given in the auditor’s report.
141. The auditor should invite the management to correct misstatements, and if the management
refuses to correct some or all communicated misstatements the auditor should find out why.
When evaluating whether the financial statements as a whole are misstated, the auditor
should consider the reasons given for not making corrections. Those charged with governance
should be notified of uncorrected misstatements and the effect that they may have, individually
or in aggregate, on the opinion in the auditor's report. The auditor’s notification should
individually identify uncorrected material misstatements in classes of transactions, account
balances or disclosures.
142. Misstatements that are clearly trivial need not normally be communicated, save where the
auditor is required by mandate to report all misstatements. The auditor needs to determine
whether uncorrected misstatements are material, individually or in the aggregate. To this
end, the auditor should consider;
the size and nature of the misstatements, in relation both to particular classes of
transactions, account balances or disclosures and to the financial statements as a whole,
and the particular circumstances of their occurrence; and
the effect of uncorrected misstatements from prior periods on the relevant classes of
transactions, account balances or disclosures, and on the financial statements as a whole.
Further guidance on evaluating misstatements is included in ISSAI 1450 17.
16
ISSAI 1560 – Subsequent Events.
17
ISSAI 1450 – Evaluation of Misstatements Identified during the Audit.
28
Forming an opinion and reporting on the financial statements
143. The auditor should form an opinion based on an evaluation of the conclusions drawn
from the audit evidence obtained, as to whether the financial statements as a whole
are prepared in accordance with the applicable financial reporting framework. The
opinion should be expressed clearly in a written report that also describes the basis
for the opinion.
144. The objectives of a financial audit in the public sector are often broader than expressing an
opinion as to whether the financial statements have been prepared, in all material respects, in
accordance with the applicable financial reporting framework. The audit mandate, or
legislation, regulation, ministerial directive, government policy requirements or resolutions by
the legislature, may include additional objectives of equal importance to the opinion on the
financial statements. These additional objectives may include audit and reporting
responsibilities relating, for example, to any findings of non-compliance with authorities.
However, even where no additional objectives are set, there may be general public
expectations in regard to the reporting of non-compliance with authorities or the effectiveness
of internal controls.
145. Auditors with responsibilities relating to reporting on compliance or non-compliance with

authorities may consider the Fundamental Principles of Compliance Auditing and related
guidelines18.
146. In order to form an opinion, the auditor must first conclude whether reasonable assurance
has been obtained as to whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error. The conclusion should take into account:
a) Whether sufficient appropriate evidence has been obtained;

b) Whether uncorrected misstatements are material, individually or in aggregate; and
c) The auditor’s evaluations of the following points, which are taken into consideration when
determining the form of the opinion:
Whether the financial statements are prepared in all material respects, in accordance
with requirements of the applicable financial reporting framework, including
consideration of the qualitative aspects of the entity’s accounting practices, such as
possible bias in management’s judgments.
Whether the financial statements adequately disclose the significant accounting
policies selected and applied,
Whether the accounting policies selected and applied are consistent with the applicable
financial reporting framework and are appropriate,
Whether the accounting estimates made by management are reasonable,
Whether the information presented in the financial statements is relevant, reliable,
comparable, and understandable,
18
ISSAIs 400, 4000 and 4200.
29
Whether the financial statements provide adequate disclosures to enable the

intended users to understand the effect of material transactions and events on the
information conveyed in the financial statements,
Whether the terminology used in the financial statements, including the title of
each financial statement, is appropriate,
Whether the financial statements adequately refer to or describe the applicable financial
reporting framework.
d) Where the financial statements have been prepared in accordance with a fair presentation
framework, the conclusion should also consider whether the financial statements achieve
fair presentation:
in terms of overall presentation, structure and content;

whether the financial statements, including the related notes, fairly present the underlying
transactions and events.
Form of opinion
147. The auditor should express an unmodified opinion if it is concluded that the financial
statements are prepared, in all material respects, in accordance with the applicable financial
framework.
If the auditor concludes that, based on the audit evidence obtained, the financial statements
as a whole are not free from material misstatement, or is unable to obtain sufficient
appropriate audit evidence to conclude that the financial statements as a whole are free from
material misstatement, the auditor should modify the opinion in the auditor’s report in
accordance with the section on “Determining the type of modification to the auditor’s opinion”.
148. If financial statements prepared in accordance with the requirements of a fair presentation
framework do not achieve fair presentation, the auditor should discuss the matter with the
management and, depending on the requirements of the applicable financial reporting
framework and how the matter is resolved, determine whether it is necessary to modify
the audit opinion.
Elements required in the auditor’s report

149. The auditor’s report should be in written form and contain the following elements:
A title that clearly indicates that it is the report of an independent auditor. An

addressee as required by the circumstances of the engagement.
An introductory paragraph that (1) identifies whose financial statements have been audited,
(2) states that the financial statements have been audited, (3) identifies the title of each
statement comprising the financial statements, (4) refers to the summary of significant
accounting policies and other explanatory information, and (5) specifies the date or period
covered by each financial statement comprising the financial statements.
A section with the heading “Management’s responsibility for the financial statements”,
stating that the management is responsible for the financial statements in accordance with
the applicable financial reporting framework and for internal controls to enable the
preparation of financial statements that are free from material misstatement, whether due
to fraud or error.
30
A section with the heading “Auditor’s responsibility”, stating that the responsibility of the
auditor is to express an opinion based on the audit of the financial statements, and
describing an audit as involving procedures to obtain audit evidence about the amounts and
disclosures in the financial statements, the procedures selected being dependent on the
auditor’s judgement as to, inter alia, the risks of material misstatement of the financial
statements, whether due to fraud or error. In making the risk assessment, the auditor should
consider internal controls relevant to the entity’s preparation of the financial statements and
design audit procedures that are appropriate in the circumstances. This section should also
refer to the evaluation of the appropriateness of the accounting policies used and the
reasonableness of the accounting estimates made by the management, as well as the
overall presentation of the financial statements. It should be stated whether the auditor
believes that the audit evidence obtained is sufficient and appropriate to provide a basis for
the auditor’s opinion.
A section with the heading “Opinion” which should use one of the following equivalent
phrases when expressing an unmodified opinion on the financial statements prepared
in accordance with a fair presentation framework:
o The financial statements present fairly, in all material respects,… in accordance with [the
applicable reporting framework]; or
o The financial statements give a true and fair view of … in accordance with [the applicable
financial reporting framework].
When expressing an unmodified opinion on financial statements prepared in accordance

with a compliance framework, the auditor’s opinion should be that the financial statements
are prepared, in all material respects, in accordance with [the applicable financial
reporting framework].
If the reference to the applicable financial reporting framework is not to the IPSASs or
the IFRSs, the auditor’s opinion should identify the jurisdiction of origin of the framework.
If required, or as determined by the auditor, a section with the heading “Report on other
legal and regulatory requirements” or otherwise as appropriate to the content of the
section, addressing other reporting responsibilities in the auditor’s report on the financial
statements that are in addition to the requirement to report on the financial statements.
The auditor’s signature.
The date on which the auditor obtained sufficient appropriate evidence on which to base
the auditor’s opinion on the financial statements, including evidence that:
o all the statements comprising the financial statements, including the related notes, have
been prepared; and
o those with the recognised authority have asserted that they take responsibility for the
financial statements.
The location in the jurisdiction where the auditor practises.
150. In addition to the opinion, the auditor may be required by law or regulation to report
observations and findings which have not affected the opinion and any recommendations
made as a result thereof. These elements should be clearly separate from the opinion.
31
Modifications to the opinion in the auditor’s report

151. The auditor should modify the opinion in the auditor's report if it is concluded that, based on the
audit evidence obtained, the financial statements as a whole are not free from material
misstatement, or if the auditor was unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material misstatement. Auditors
may issue three types of modified opinions: a qualified opinion, an adverse opinion and a
disclaimer of opinion.
Determining the type of modification to the auditor’s opinion

152. The decision regarding which type of modified opinion is appropriate depends upon:
The nature of the matter giving rise to the modification – that is, whether the financial
statements are materially misstated or, in the event that it was impossible to obtain
sufficient appropriate audit evidence, may be materially misstated; and
The auditor’s judgment about the pervasiveness of the effects or possible effects of the
matter on the financial statements.
153. The auditor should express a qualified opinion if: (1) having obtained sufficient appropriate
audit evidence, the auditor concludes that misstatements, individually or in the aggregate,
are material, but not pervasive, to the financial statements; or (2) the auditor was unable to
obtain sufficient appropriate audit evidence on which to base an opinion, but concludes that
the effects on the financial statements of any undetected misstatements could be material
but not pervasive.
154. The auditor should express an adverse opinion if, having obtained sufficient appropriate
audit evidence, the auditor concludes that misstatements, individually or in the aggregate,
are both material and pervasive to the financial statements.
155. The auditor should disclaim an opinion if, having been unable to obtain sufficient appropriate
audit evidence on which to base the opinion, the auditor concludes that the effects on the
financial statements of any undetected misstatements could be both material and pervasive. If,
after accepting the engagement, the auditor becomes aware that management has imposed a
limitation on the audit scope that the auditor considers likely to result in the need to express a
qualified opinion or to disclaim an opinion on the financial statements, the auditor should
request that management remove the limitation.
156. If expressing a modified audit opinion, the auditor should also modify the heading to
correspond with the type of opinion expressed. ISSAI 1705 19 provides additional guidance
on the specific language to use when expressing a modified opinion and describing the
auditor’s responsibility. It also includes illustrative examples of reports.
19
ISSAI 1705 – Modifications to the Opinion in the Independent Auditor’s Report.
32
Emphasis of Matter paragraphs and Other Matters paragraphs in the auditor’s report
157. If the auditor considers it necessary to draw users’ attention to a matter presented or
disclosed in the financial statements that is of such importance that it is fundamental to their
understanding of the financial statements, but there is sufficient appropriate evidence that the
matter is not materially misstated in the financial statements, the auditor should include an
Emphasis of Matter paragraph in the auditor’s report. Emphasis of Matter paragraphs should
only refer to information presented or disclosed in the financial statements.
158. An Emphasis of Matter paragraph should:
be included immediately after the opinion;

use the Heading “Emphasis of Matter” or another appropriate heading;
include a clear reference to the matter being emphasised and indicate where the relevant
disclosures that fully describe the matter can be found in the financial statements; and
indicate that the auditor’s opinion is not modified in respect of the matter emphasised.
159. If the auditor considers it necessary to communicate a matter, other than those that are
presented or disclosed in the financial statements, which, in the auditor’s judgement, is
relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s
report, and provided this is not prohibited by law or regulation, this should be done in a
paragraph with the heading “Other Matter,” or another appropriate heading. This paragraph
should appear immediately after the opinion and any Emphasis of Matter paragraph.
160. If the auditor expects to include either or both of these paragraphs in the auditor’s report, the
auditor should communicate that expectation and the wording of such paragraphs to those
charged with governance. The auditor may also be required or decide to notify other parties,
such as the legislature, in addition to those charged with governance.
161. Public-sector audit mandates or expectations may expand the circumstances in which it
would be relevant to include an Emphasis of Matter paragraph (concerning a matter properly
disclosed in the financial statements) or an Other Matters paragraph (concerning information
not disclosed in the financial statements).
Comparative information – corresponding figures and comparative financial statements

162. Comparative information’ refers to amounts and disclosures included in the financial
statements in respect of one or more prior periods. The auditor should determine whether
the financial statements include the comparative information required by the applicable
financial reporting framework, and whether such information is correctly classified. To
accomplish this, the auditor should evaluate whether:
the comparative information agrees with the amounts and other disclosures that
were presented in the prior period or, where appropriate, have been restated; and
the accounting policies reflected in the comparative information are consistent with those
applied in the current period or, if there have been changes in accounting policies, whether
those changes have been properly accounted for and adequately presented and disclosed.
33
163. If the auditor becomes aware, during the current period, of a possible material misstatement in
the comparative information, the auditor should perform such additional audit procedures as
are necessary in the circumstances to obtain sufficient appropriate audit evidence as to
whether a material misstatement exists.
164. Comparative information may take the form of corresponding figures which are included as
an integral part of the current period financial statements and are intended to be read only in
relation to the amounts and other disclosures relating to the current period. When
corresponding figures are presented, the auditor’s opinion should not refer to them save in
the following circumstances:
If the auditor’s report on the prior period, as previously issued, included a qualified
opinion, a disclaimer of opinion or an adverse opinion, and if the matter which gave rise to
the modification is unresolved, the auditor should express a qualified opinion or an
adverse opinion in the auditor's report on the current period financial statements, modified
with respect to the corresponding figures included therein.
If the auditor obtains audit evidence that a material misstatement exists in the prior period
financial statements on which an unmodified opinion was issued, and if the corresponding
figures have not been properly restated or appropriate disclosures have not been made, the
auditor should express a qualified opinion or an adverse opinion in the auditor’s report on
the current period financial statements.
If the prior period financial statements were not audited, the auditor should state in an Other
Matter paragraph that the corresponding figures are unaudited.
The auditor should consider these circumstances using the current year for purposes of
comparison and the materiality considerations for the current year. If comparative financial
statements are presented, the auditor’s opinion should refer to each period for which they
are presented and on which an audit opinion is expressed.
165. When reporting on prior period financial statements in connection with the current period
audit, if the auditor’s current opinion on the prior period financial statements differs from the
opinion previously expressed, the auditor should disclose the substantive reasons for the
difference in an Other Matters paragraph.
166. If the financial statements of the prior period were audited by a predecessor auditor, in
addition to expressing an opinion on the current period financial statements the auditor should
state in an Other Matter paragraph:
that the financial statements of the prior period were audited by the predecessor auditor; the
type of opinion expressed by the predecessor auditor and, if the opinion has been
modified, the reasons for doing so; and
the date of the previous report (unless the predecessor auditor’s report on the prior period
financial statements is reissued with the present financial statements).
34
167. If the auditor concludes that the prior period financial statements on which the predecessor
auditor reported without modification are affected by a material misstatement, the auditor
should communicate the misstatement to the appropriate level of management and those
charged with governance and request that the predecessor auditor be informed. If the prior
period financial statements are amended and the predecessor auditor agrees to issue a new
auditor's report on the amended financial statements, the auditor should report only on the
current period.
168. If the prior period financial statements were not audited, the auditor should state in an Other
Matter paragraph that the comparative financial statements are unaudited. Doing this does not
exempt the auditor from the need to obtain sufficient appropriate audit evidence that the opening
balances do not contain misstatements that materially affect the current period financial
statements. Further guidance on comparative information is included in ISSAI 171020.
The auditor’s responsibilities in relation to other information in documents containing

audited financial statements
169. The auditor should read the other information in order to identify any material inconsistencies
or material misstatement of fact with the audited financial statements. If, on reading the other
information, the auditor identifies a material inconsistency or material misstatement of fact,
the auditor should determine whether the audited financial statements or the other information
needs to be revised. The action the auditor should take may include modifying of the auditor's
opinion, withholding the auditor's report, withdrawing from the engagement (in the rare cases
where this is possible in the public sector), notifying those charged with governance, or
including an Other Matter paragraph in the auditor's report.
170. If the auditor identifies a material inconsistency or material misstatement of fact that the
management refuses to correct, the auditor is required to notify those charged with
governance. Auditors may also be required or decide to notify other parties, such as the
legislature, in addition to those charged with governance. Further guidance on the
auditor’s responsibilities in relation to other documents is included in ISSAI 1720 21.
Special considerations – audits of financial statements prepared in accordance with special-

purpose frameworks
171. The auditor is required to determine the acceptability of the financial reporting framework
that was applied when preparing the financial statements. In an audit of special-purpose
financial statements, the auditor should obtain an understanding of:
the purpose for which the financial statements are prepared;

the intended users; and
the steps taken by management to determine that the applicable financial reporting
framework is acceptable in the circumstances.
20
ISSAI 1710 – Comparative Information – Corresponding Figures and Comparative Financial Statements.
21
ISSAI 1720 – The Auditor’s Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements.
35
172. In planning and performing an audit of special-purpose financial statements, the auditor should
determine whether the circumstances of the engagement require special consideration to be
given to application of the ISSAIs.
173. When forming an opinion and reporting on special-purpose financial statements, the auditor
should comply with the same requirements as for general-purpose financial statements.
The auditor’s report on special-purpose financial statements should:
describe the purpose for which the financial statements have been prepared; and
make reference to the management’s responsibility for determining that the applicable
financial reporting framework is acceptable in the circumstances where the
management has a choice of frameworks to use in preparing the financial statements.
174. The auditor should include an Emphasis of Matter paragraph alerting users to the fact that the
financial statements have been prepared in accordance with a special-purpose framework
and that, as a result, they may not be suitable for another purpose.
175. Further guidance on the special considerations in relation to audits of financial statements
prepared in accordance with special-purpose frameworks is included in ISSAI 1800 22.
Special considerations – audits of single financial statements and specific elements, accounts
or items of a financial statement
176. In the case of an audit of a single financial statement, or of a specific element of a financial
statement, the auditor should first determine whether the audit is practicable. The fundamental
principles apply to audits of a single financial statement, or of a specific element of a financial
statement, irrespective of whether the auditor is also engaged to audit the entity’s complete set
of financial statements. If the auditor is not also engaged to audit the complete financial
statements, the auditor should determine whether the audit of a single financial statement, or of
a specific element of those financial statements, is in accordance with the fundamental
principles set out in the relevant auditing standards.
177. The auditor should also determine whether application of the financial reporting framework
will result in a presentation that provides adequate disclosure to enable the intended users to
understand the information in the financial statement or the element thereof, as well as the
effect of material transactions and events on that information.
178. The auditor should consider whether the expected form of opinion is appropriate in the
circumstances of the engagement, and should adapt the reporting requirements as necessary.
179. If the auditor is engaged to report on a single financial statement, or on a specific element of
a financial statement, in conjunction with an engagement to audit the entity’s complete set of
financial statements, the auditor should express a separate opinion for each engagement.
22
ISSAI 1800 – Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks.
36
180. If the opinion in the auditor’s report on an entity’s complete financial statements is modified, or
the report includes an Emphasis of Matter paragraph or Other Matter paragraph, the auditor
should determine the effect this may have on the auditor’s report on a single financial
statement or a specific element of a financial statement. Where appropriate, the auditor
should modify the opinion or include an Emphasis of Matter paragraph or Other Matter
paragraph in the auditor’s report on the single financial statement or specific element of a
financial statement.
181. If the auditor concludes that it is necessary to express an adverse opinion or disclaim an
opinion on the entity’s complete financial statements, the auditor may not issue an unmodified
auditor’s opinion on a single financial statement or a specific element thereof. This is because
an unmodified opinion would contradict the adverse opinion or disclaimer of opinion on the
financial statements as a whole. Additional requirements and guidance on issuing these
reports in conjunction with the opinion on the complete set of financial statements are provided
in ISSAI 180523.
Considerations relevant to audits of group financial statements (including whole-of-

government financial statements)
182. Auditors engaged to audit group financial statements should obtain sufficient
appropriate audit evidence regarding the financial information of all components and
the consolidation process to express an opinion as to whether the whole-of-
government financial statements are prepared, in all material respects, in accordance
with the applicable financial reporting framework.
183. The principles of ISSAI 200 apply to all public-sector audits of financial statements, whether for
components of government or the whole of government. In situations where the auditor is
engaged to audit group financial statements, such as whole-of-government accounts, specific
requirements and considerations may apply. The auditor carrying out an audit of group
financial statements is referred to as the group auditor. The group auditor should establish a
group audit strategy and develop a group audit plan. The principles for understanding the
entity should include an understanding of the group, its components and their environments,
including group-wide controls, as well as the consolidation process. The understanding thus
obtained should be sufficient to confirm or revise the initial identification of components that
are likely to be significant for the group financial statements, and to assess the risks of material
misstatement, whether due to fraud or error, of the group financial statements.
184. Components of group financial statements may include agencies, departments,

bureaus, corporations, funds, component units, districts, joint ventures and non-
governmental organisations. Components may be considered to be significant:
due to their individual financial significance;

if, due to their specific nature or circumstances, they are likely to include significant risks
of material misstatement of the group financial statements;
23
37
if they involve matters that have heightened public sensitivity, such as national
security issues, donor-funded projects or reporting on tax revenue.
185. In the public sector, it can be difficult to decide which components to include in the group
financial statements. Application of the financial reporting framework may result in the
exclusion of a specific type of agency, department, bureau, corporation, fund, district, joint
venture or non-governmental organisation. In such cases, if the group auditor believes that
this outcome would result in a misleading presentation of the group financial statements, the
group auditor may consider, in addition to the impact on the auditor’s report, the need to
communicate the matter to the legislature or other appropriate regulatory bodies.
186. In certain situations the financial reporting framework may not provide specific guidance for
the inclusion, or exclusion, of a specific type of agency, department, bureau, corporation, fund,
district, joint venture or non-governmental organisation in the group financial statements. In
such cases, the group auditor may participate in discussions between group management and
component management to determine whether the treatment of the component in the group
financial statements will result in a fair presentation. This difficulty may have implications for
using the work of component auditors. It is also possible that the group management will not
agree to include the component in the group financial statements, which may in turn limit the
ability of the group auditor to communicate with and use the work of the component auditor.
187. In the case of a component that is significant due to its individual financial significance within
the group, the group audit team, or a component auditor on its behalf, should audit the
financial information of the component using a component materiality value set by the group
auditor. For a component that is significant due to its specific nature or circumstances and
because it is likely to mean significant risks of material misstatement of the group financial
statements, the group audit team, or a component auditor on its behalf, may not need to audit
the financial information but may apply specified audit procedures relating to the significant
risks identified. In the case of components that are not significant, the group audit team should
perform analytical procedures at group level.
188. When developing or adopting auditing standards based on, or consistent with, the
Fundamental Principles of Financial Auditing, it may be useful to consider the
detailed guidance on group audits in ISSAI 1600 24.
24
ISSAI 1600 – Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors).
38

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The International Standards of Supreme Audit Institutions, or ISSAIs, are issued by

INTOSAI, the International Organisation of Supreme Audit Institutions. For more

2. ISSAI 100 – Fundamental Principles of Public-Sector Auditing provides the fundamental

4. Financial audit focuses on determining whether an entity’s financial information is presented in

states’ or entities’ accounts or other financial reports, not necessarily prepared in

6. This ISSAI provides detailed information on the following:

The purpose and authority of the Fundamental Principles of Financial

PURPOSE AND AUTHORITY OF THE FUNDAMENTAL PRINCIPLES

8. ISSAIs 1000 to 1810 on financial audits may be applied as appropriate to these

as a basis on which to develop standards,

ISSAI 100 further explains the authority attached to the ISSAIs.

FRAMEWORK FOR FINANCIAL AUDITING

The objective of financial auditing

Public-sector applications covered by ISSAI 200

Preconditions for an audit of financial statements in accordance with the ISSAIs

a statement of financial position;

Audits of financial statements prepared in accordance with special-purpose frameworks

28. Special-purpose frameworks relevant to the public sector may include:

ELEMENTS OF FINANCIAL AUDITING

The three parties in financial auditing

Subject matter information

Reasonable assurance engagement

PRINCIPLES OF FINANCIAL AUDITING

Prerequisites for conducting financial audits

Ethics and independence

45. Public-sector auditors engaged on audits of financial statements in accordance with

o leading, supervising and carrying out the audit;

Engagement team management and skills

Understanding, through appropriate training, and practical experience of audit

Principles related to basic audit concepts

51. In general, the audit risk depends on the following components:

a) Inherent risk – the susceptibility of the subject matter information to

Professional judgement and professional scepticism

56. Professional judgement is necessary in particular in decisions about:

materiality and audit risk;

the evaluation of management’s judgement in applying the financial reporting framework

71. Adequate audit documentation is important for several reasons. It will:

confirm and support the auditor’s opinions and reports;

the timely preparation of documentation;

Principles related to the audit process

Agreeing the terms of the engagement

identify the characteristics of the engagement that define its scope;

the nature, timing and extent of planned risk assessment procedures;

Understanding the audited entity

o compliance with laws and regulations, such as procurement regulations;

93. Risk assessment procedures may include:

whether the risk is a risk of fraud;

Responses to assessed risks

Considerations relating to fraud in an audit of financial statements

116. Generally speaking, determining whether the going-concern assumption is appropriate is

Considerations relating to laws and regulations in an audit of financial statements

the use of external confirmations as audit evidence;

Consideration of subsequent events

steps to obtain an understanding of any procedures established by management to

140. Uncorrected misstatements should be evaluated for materiality, individually or in aggregate, to

Further guidance on evaluating misstatements is included in ISSAI 1450 17.

Forming an opinion and reporting on the financial statements

145. Auditors with responsibilities relating to reporting on compliance or non-compliance with

a) Whether sufficient appropriate evidence has been obtained;

Whether the financial statements provide adequate disclosures to enable the

in terms of overall presentation, structure and content;

Elements required in the auditor’s report

A title that clearly indicates that it is the report of an independent auditor. An